Rich nerd, poor nerd

Rich nerd, poor nerdTwo cents on managing your finances after you graduate Laura A. McLay Virginia Commonwealth University lamclay@vcu.edu http://punkrockOR.wordpress.com

My parents celebrate their 40th wedding anniversary next weekhttp://www.celebrities-galore.com/celebrities-photos/david-letterman.jpg http://www.triviatribute.com/images4/audreymeadows4.jpg (These are their celebrity doppelgangers)

My parents gave me a lot of advice• Always say please and thank you.• Exercise every day.• Eat your vegetables.• Eat a green vegetable every day.• Don’t eat sugary breakfast cereals.• Lift with your legs, not your back. Today I’m going to talk about their financial advice

We didn’t have a lot of money when I was growing up…• We clipped coupons• We ate food from the generic aisle• We took free classes at the park district• We read books at the library rather than buying books• We didn’t belong to a gym, we used the heavily subsidized workout facilities at parks & recreation• We only went to museums on free days• We only ate out on special occasions• We shopped around for clothes, shoes, etc. to get bargains (the 21st century version of my mom uses craigslist, ebay, and Groupon)• Etc. http://www.flickr.com/photos/sugarpants/4369289730/sizes/m/in/photostream/

…but we were “rich”• My parents were able to buy a nice house• They saved for retirement• We took family vacations• I even graduated from college without loans Without my parents’ savvy financial habits, none of this would have been possible! They could easily have been broke. Here are their six basic financial rules.

Lesson #1 Live within your means,even if you are on a graduate student stipend. Exception: taking out student loans is OK.

Work toward paying for these things in cash• Appliances• Furniture• Bathroom and kitchen remodels• Used cars• New cars!…anything that costs <$2000.(We’ll come back to that later)

Buy a nice house that your grandmother wouldn’t consider a mansion http://www.mymoneyblog.com/save-money-on-housing-live-well-in-less-space.htmlThe tax deduction for the interest that you pay on your mortgage is not much of abenefit. You only receive a discount—not a savings—on your mortgage. And this isonly on the part of the mortgage interest that takes you above the standard deduction.The tax deduction does not warrant buying the biggest house you can afford.

Having one expensive habit and some occasional expenses are OK (as long as you don’t have to take out loans*!)• Vacations• Kids• Espresso• Shoes?* A loan is anything that you cannot pay off right now, including charges on your credit card. We’ll come back to that later.

What does the average wedding cost?• Three major surveys indicate that the average wedding costs $30,000.• True or false:The average wedding costs $30,000.

FALSE!!!Why are wedding costs over-estimated?1. Kim Kardashian’s $10,000,000 wedding is averaged into this value The median cost is more appropriate here. The median wedding cost is $15,000.2. They take a biased sample Only people who register at pricey wedding boutiques are asked to take these surveys They are much more likely to have expensive weddings People who have courthouse weddings are not included!

Lesson #2Don’t live paycheck to paycheck: Put enough away for a rainy day

Quick question:If you were to face a $2,000 unexpected expense in the next month, could you get the funds you need?(a) certainly able(b) probably able(c) probably not able(d) certainty not ableNational Bureau of Economic Research survey from 2009

Nationally, this is how people answereda) 24.9%b) 25.1%c) 22.2%  probably not abled) 27.9%  certainly not ableSo almost exactly half of all respondents would have trouble meeting an unexpected financial expense!Takeaway: Most people file for bankruptcy when they face a small ($1500), unexpected expense.

Even the affluent do not save enoughFor those making >$150Kc) 4.7%d) 9.8%For those making $100-$150Kc) 12.9%d) 10.8%

How much should you save? You should save enough to live for six months with no income. In this current recession, we have seen record numbers of long- term unemployment (more than 6 months of unemployment)http://mercatus.org/sites/default/files/Recession%20and%20Long- http://www.bls.gov/opub/ils/summary_10_05/long_term_unemployment.htmTerm%20Unemploymentsmaller%20NEW.jpg

Lesson #2bStart saving for retirement. Now.

Retirement savings 2% inflation, 3.5% interest $1,200,000 $1,000,000 $5000 x 5 = $25,000 makes you $136,000 at retirement $800,000 Retirement Savings $600,000 $400,000 $200,000 $0 20 25 30 35 40 45 50 55 60 Age when you start saving for retirement ($5000 net present value in savings per year)* This ignores dividends and other benefits of starting to save early!

Retirement savings $1,800,000 2% inflation, 5% interest $1,600,000 $5000 x 5 = $25,000 makes you $270,000 at retirement $1,400,000 $1,200,000 Retirement Savings $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 20 25 30 35 40 45 50 55 60 Age when you start saving for retirement ($5000 net present value in savings per year)* This ignores dividends and other benefits of starting to save early!

How much can you save?Roth IRAs• $5000 per year, with a potential increase based on inflation• Available to single filers who earn up to $105K per year or joint filers who earn up to $169K together• One benefit is that the tax is not deferred.401Ks• $16,500 per year, generally tax-deferred

Lesson #3 Pay off your credit cardsin full every single month. There are no excuses.

What happens if you don’t?• Say you have $2000 credit card debt on a card with 15.7% interest with a minimum payment of $25. – You will never pay off the debt!!• If you pay $30 per month instead, you will end up spending $4553.69 over 28+ years to pay off the debt. – The $2554 in interest alone can be put in your ROTH IRA.

Lesson #3bCorollary: Never ever take out a title loan.

Lesson #4Don’t gamble.

If you’re forced to play the lottery… http://online.wsj.com/article/SB125366023562432131.html …pick large numbers!

Lesson #5 Pay off your student loans.(OK, this one wasn’t from my parents, since their frugal lifestyle led to no student loans for me back when college was a lot cheaper. This rule is in the spirit of their financial advice for those going to college now)

Why?From Megan McArdle, MBA: “Congress has made it very difficult to shed student loan debt. No student loans, not even the private ones, can be discharged in bankruptcy. As a result, all the personal finance experts Ive ever listened or talked to say that theyre incredibly hard to get rid of… There are only two ways to erase the debt: prove youre permanently disabled and will never again earn more than a pittance; or die.”http://www.theatlantic.com/business/archive/2011/06/dont-count-on-settling-those-student-loans/240272/

Lesson #6 Marry well.(i.e., marry a saver!)

If you follow this advice, you’ll lead a frugal life and you might drive a car like this, but you’ll be rich.

But then again, what do I know?Dr. Laura A. McLaylamclay@vcu.eduhttp://punkrockOR.wordpress.com/@lamclay on twitter

Rich nerd, poor nerd

by Laura McLay

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